Building The Perfect Portfolio: Value/Growth Ideas

by: Brian Nichols

How to build the perfect portfolio is a widely-debated topic with many different opinions regarding the matter. Most financial advisers will tell you to invest 7% - 8% in each stock and to be diversified, which basically means to have a variety. During the next few articles we will discuss how to build the perfect portfolio without a "one system fits all" strategy. I will discuss several stocks that are both good for short, long, and everything in between. Along with percentages and how to better position yourself for success.

I have never agreed with the 7-8% holding rule within a portfolio. When I first began investing I was starting with roughly $5,000 and although investing with the 7% rule would have limited my risk it was not going to grow my portfolio at the speed that I desired. I believe that the way a portfolio is divided should depend on the size of the portfolio and not a "one system fits all." Because with a $5,000 portfolio I was 19 years old using money that I had saved while working in college and I was using it as a way to educate myself about the market. But over the years my goals have significantly changed and my willingness to take risk has declined. Therefore, I believe as your portfolio grows you goals change as well. Below is a general guideline that I have always used as my portfolio has grown through gains and additional investments. The chart will show the way that I believe is the best way to divide a portfolio by the total number of holdings to give the highest potential for gains while minimizing risks.

Portfolio Value Number of Stocks
$5,000 - $10,000 2 - 3
$10,000 - $20,000 4 - 6
$20,000 - $50,000 7-10
$60,000 - $100,000 11-14
$100,000 - $250,000 15 - 20
$250,000 - $500,000 20 - 30

Dividing Your Portfolio

There is no standard or correct way to diversify or divide your portfolio. There are too many factors involved for one standard method. My goal is to maximize the reward while minimizing the risk by purchasing shares that I believe present value, or that have fallen for reasons that are not related to the company. Yet someone else who is near retirement may wish to minimize risk but most likely still desires a decent reward, therefore this person may prefer bonds. It's impossible to give a formula that will work for everyone yet I have had success with the formula above.

I currently hold 15-20 stocks at any given time and diversify the stocks based on my long-term goals. My idea of diversification is much different than the average investor, and I won't say that it will work for everyone but it has worked for me. When most people think of diversification in a portfolio they are speaking of a variety of stocks, mutual funds, bonds, emerging markets, etc. Along with having a variety of securities in all sectors or industries to limit risk. I use diversification in my portfolio to invest in stocks with different levels of potential rather than a variety of industries or sectors. I have been investing in stocks with this concept for the last two years when I was forced to change my investing strategy as my portfolio became larger.

Investment Categories

I place investments into six categories and utilize each in my portfolio. I believe that each has a purpose and rather than concentrating on diversifying my portfolio with different industries my goal is to diversify my portfolio with the type of stocks that I choose. And like I said, this isn't for everyone but I have tried various strategies over the last few years and I am yet to find one with returns such as diversifying your portfolio with stocks that serve a different purpose. Below is a chart of the six categories of stocks that I use in my portfolio along with the percentage of my portfolio that each category represents within my portfolio. Over the next couple weeks I will better explain each category and its uses within an investor's portfolio. Regardless of what your individual investment goals are you can use this knowledge to better diversify your portfolio. I will also mention several stocks for each category that I believe are among the best that will serve the best purpose within a portfolio.

Long-Term Yield 30%
Long-Term Value/Growth 20%
Short-Term Value 20%
Short-Term Growth 15%
Small Cap 10%
Emerging Markets 5%

Long-Term Value/Growth Stocks

Long-Term Value/Growth stocks account for 20% of my portfolio, and I usually have 3 maybe 4 stocks in this category at any given time. These stocks are usually held over long periods of time however it's much shorter than the Long-Term Yield stocks that were discussed on Monday.

The purpose of this category is to find growing companies that are trading at a price that I believe presents value. However stocks in this category can also be growth stocks that are trading on momentum. With this particular category I believe that industries and sectors are very important because the goal is to capitalize on value and growth while minimizing risk and since industries typically trade together you can understand future reaction by watching the trends of an industry.

The industries and sectors that I use for this category will change over time as the industries within the markets change. But over the next 5-10 years I feel confident that the banking and auto industry will grow significantly larger. Therefore I purchase one stock in each sector that I believe presents the highest level of value compared to performance. As for growth, I believe the technology sector presents the highest level of growth with several stocks that have long-term potential for gains before reaching a level of maintenance. Therefore I invest in the technology sector for my growth stocks more specifically companies that have a strong presence in the communications industry.

Auto Industry

The auto industry continues to recover from the economic devastation of the recession. During the recession the auto industry was one of the most negatively affected industries within the market. However, the industry as a whole is showing significant growth with sales that continue to outperform year-over-year. However, despite strong growth from the auto industry it has trended much lower during the last three months with pessimism surrounding the market.

My personal opinion regarding the auto industry's stock performance is that loss is a result of fear and not necessarily individual company performance because 2008 is fresh on the minds of all investors and many of these investors got burned with investments in General Motors (NYSE:GM) and Ford (NYSE:F) during the recession. Therefore it makes sense that when faced with the possibility of a recession the market's initial reaction would be to sell auto stocks. I believe that this reaction presents substantial value for one of the stronger industries in the market.

Auto sales are still significantly lower than 2006 yet sales are substantially higher over the last two years, since the recession. The two companies that have performed among the best are Ford and General Motors with management that has completely rebranded its product with a new found emphasis on fuel-efficiency. Both companies have created new models and changed the body style of existing models along with incorporating higher levels of technology into models for a consumer base that desires cutting edge technology. But despite strong sales and encouraging guidance, such as Ford announcing it expects sales to increase by 50% in 2015, both stocks have trended much lower with the market. Therefore I believe that both stocks make great additions to an investor's portfolio as a long-term investment in an industry that continues to recover. Both companies are working hard to innovate products, have new contracts with union, expanding operations in other regions of the world, and most importantly each company is increasing sales and showing no sign of slowing down anytime soon.

Banking Stocks

The banking sector is highly debated and has been the center of recession fears over the last few months. The sector is affected by the issues in Europe, high unemployment, and the housing crisis yet despite these issues several of these companies continue to perform quite well. And although I'm not a fan of Bank of America (NYSE:BAC) it's trading at $6.60 while its book value per share is $20.80. There are several banking stocks that are trading much lower than its book value such as Citigroup (NYSE:C) which trades at $30 but has a book value of $60.56. I believe that these stocks present value but could take a while to reach or exceed book value, but when it does the gains will be incredible.

I place banking stocks into three categories: Commercial, Residential, and Regional. And although both Citigroup and BofA have a strong presence in both commercial and residential, I believe Citigroup is the better investment with a much stronger presence in commercial banking, which I believe is stronger and will recover much faster than residential. The economic problems that affect banks will most likely remain a problem for at least another 5 years. Therefore the chances that these stocks will recover to its true worth are unlikely. With C is trading at only 8x earnings, I believe it offers long-term value with little risk.

However regional banks within the financial sector are an industry that few people are discussing, yet several companies are performing quite well despite lagging stock performance. I believe that regional banks are the safest investment with a significant amount of upside with limited risks. Because these banks are only affected by the region in which they are located and don't have the same exposure to risk as money center banks. Two regional bank stocks that I particularly like are Huntington Bancshares (NASDAQ:HBAN) and Fifth Third Bancorp (NASDAQ:FITB). Both banks have fundamentally improved over the last two years and operate in growing regions of the country. Yet both stocks have trended lower with the market and are now beginning to recover. The financial sector as a whole has value and I believe that both regional and money center banks will drastically improve with the financial economy over the next 10 years. My stance is that regional banks present similar levels of value and are not exposed to the same level of economic issues as larger banks such as Bank of America or Citigroup.


Communications is one of the fastest growing industries in the market which is why I chose AT&T (NYSE:T) and Verizon (NYSE:VZ) in part 1 which covered long-term yield stocks. Both AT&T and Verizon benefit from the innovation and transcendent technology of companies such as Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG). I believe that both Apple and Google are just getting started and haven't reached anywhere close to full potential. And I don't think you can find two companies that are growing nearly as fast as either of these two companies but trading at only 15-20x earnings.

Apple's newest iPhone sold millions of units the first week and broke records for best release of an iPhone. The company is, most likely, set up for the next five years with products to be strategically released including a new iPad and an iPhone 5 that will be one of the most anticipated products in the history of technology. The company continues to transcend the market and control the industry with technology that is yet to be matched. I believe that Apple is far from reaching its high price, in fact I believe it could easily double from its current price. Because as new iPhones and iPads are released, older versions will become more affordable for the millions who can't afford the current versions which will only increase sells.

I have owned Google shares for almost two years and decided to purchase Google because it has more segments that create revenue. I believe that GOOG is presenting a perfect price to purchase for long-term unprecedented growth. Its recent acquisition of Motorola Mobility (NYSE:MMI) will give the company a handset manufacturer along with 1000's of patents that it so desperately needs. And its purchase of Zagat should improve several of its social networking sites to give reviews and will result in a higher level of traffic to various Google sites. I believe that Google is making all the right moves to become a dominant player in the communications industry along with controlling the internet search industry for many years to come. Therefore with Google making the right decisions for its future I expect the company to continue growing and to expand into other segments over the next few years.

Both Apple and Google are growing and I believe that either company would make a great addition to a portfolio as a long-term growth stock. And the only reason that I am more partial to Google is because of the history of mobile phones. Over the last 25 years there have been several companies which controlled the mobile phone industry for a period of 2-5 years such as: Nokia (NYSE:NOK), Research In Motion (RIMM), or Motorola (MOT). History tells us that companies that create communication devices rise and fall very fast and then another company develops "the next big thing." Therefore I am more bullish on GOOG because of its internet presence and although Apple has already broken all the rules and by far has created the best devices in the history of communications, I believe that GOOG is the safer investment while capitalizing on a fast growing company.

These are several great investments for long-term value/growth stocks. For value I have chosen to invest in auto and banking stocks because I believe these sectors include stocks that are performing exceptionally well but are yet to perform in the market. I believe the performance of the stocks that I have mentioned within the auto and banking sectors has been a result of market fear rather than company performance. Therefore this creates value and, if one is patient, these investments will eventually return gains for the investor. Yet there are several industries and sectors that will provide this benefit to a portfolio such as the construction and transportation sectors that have been beaten down but are made up of fast growing companies. I have chosen to invest in the technology sector for my long-term growth stocks, more specifically communication device manufacturers.

And although I believe that technology is unmatched in terms of growth stocks, there are several industries that correlate with tech stocks that would make great growth investments as well, such as service stocks. The point is that you don't have to use the exact same stocks or industries that I have chosen but having long-term growth and value stocks are important to one's portfolio. And much like long-term yield stocks, you should never sell this category of investments unless you are ready to exit the position. You should only add to your position when the stock presents value for some reason that is not related to the individual company.

Disclosure: I am long GM, HBAN, GOOG.

Additional disclosure: As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy but rather informational purposes only.